Mr. Market's Big Mistake, and How You Can Profit From It

If you're reading this, chances are you watched as global stock markets fell apart yesterday. The tech-heavy Nasdaq, in particular, ended down close to 7% as bellwether tech names bled red and traders ran for cover.

Apple (Nasdaq: AAPL  ) fell 5.5%. Qualcomm (Nasdaq: QCOM  ) declined 7.3%. And Microsoft (Nasdaq: MSFT  ) , which S&P named as one of five whose debt now rates higher than U.S. Treasuries, closed off 4.7%. Today's rally in the shares of all three of these stocks shows the selloff to be more of Mr. Market's erratic, nonsensical behavior. But if you look at the numbers, you'll see that some stocks are better bargains than others:

Company

Estimated 5-Year Earnings Growth

Excess Cash-Equivalents After Debt

Forward P/E

Apple 22.52% $28.4 billion 13.77
Canon 7.55% $11.3 billion 17.50
Cisco Systems 10.11% $26.6 billion 9.26
Dell 6.00% $6.9 billion 7.85
Google 18.86% $32.9 billion 16.27
Hewlett-Packard 9.22% ($10.2 billion) 6.48
Intel 11.09% $9.4 billion 8.76
IBM 11.83% ($17.9 billion) 12.85
LM Ericsson Telephone 10.00% $7.7 billion 11.74
Microsoft 9.74% $38.2 billion 9.04
Nokia 6.90% $6.1 billion 16.19
Oracle 15.09% $12.9 billion 11.93
Qualcomm 16.47% $9.5 billion 16.12

Sources: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance. Cash is reflective only of short-term investments and does not include long-term investments.

This table tells me two things. First, traders don't care about balance sheets. Some of yesterday's biggest losers have billions in the bank. Second, more than half of these top techs trade below the long-term growth estimates analysts have set. Here's a look at the eight with the widest deltas between P/E and anticipated growth, and their resulting PEG ratios:

Sources: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance.

The case for Apple gets stronger
Based on the numbers alone, I think there are good cases to be made for Intel (Nasdaq: INTC  ) and Google (Nasdaq: GOOG  ) . I'm less convinced of HP's value, regardless of what the PEG says. Of them all, I love how the fastest grower -- a certain maker of Macintosh computers -- also sports the most attractive valuation on the basis of price to earnings to projected growth.

True, the PEG can make for extremely dangerous shorthand, especially in the hands of an investor who's done no other valuation work or study of the underlying business. But in Apple's case, the 0.61 PEG looks delicious for two reasons:

  1. Estimates call for less than half the annualized growth achieved over the past five years.
  2. Analysts routinely underestimate Apple's growth potential.

There's also the company's cash hoard to consider: $28 billion if you don't count long-term investments, $76 billion if you do. Giving Apple full credit for its war chest wouldn't be fair, given its history of earning poor cash returns. But partial credit would make sense.

Apple and Microsoft are two of the industry'?s best at producing returns on available capital, which includes the billions in cash each company generates annually. Add it all up and you have a selloff that may as well have been an early Christmas gift from Mr. Market and his merry band of panicked traders.

Do you agree? Disagree? Weigh in using the comments box below. And if you're in the mood for more stock ideas, try this free video. You'll walk away with a better understanding of a new computing revolution that's reshaping industries as well as a winning pick from our Motley Fool Rule Breakers scorecard.  Start watching now -- it's 100% free.

Fool contributorTim Beyers is a member of theMotley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, IBM, and Oracle at the time of publication. Check out Tim'sportfolio holdings andFoolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insightsdelivered directly to your RSS reader.

The Motley Fool owns shares of IBM, Google, Oracle, Apple, Microsoft, and Qualcomm, Cisco, and Intel, has created a bull call spread position on Cisco, and has bought calls on Intel.Motley Fool newsletter services have recommended buying shares of Cisco Systems, Intel, Apple, Google, and Microsoft, creating bull call spread positions in Apple and Microsoft, and creating a diagonal call position in Intel.Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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Source: http://feeds.fool.com/~r/usmf/foolwatch/~3/1X6Q2D1PT-I/mr-markets-big-mistake-and-how-you-can-profit-from.aspx

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Non-Biz Books to Help You Think More Clearly in a Crisis

Reading off topic booksIn stressful circumstances the brain works in wonky ways. In fact, those who are most likely to survive in the wilderness are not the ones with the proper tools and training, but the people who are able to control their state-of-mind.

In Deep Survival: Who Lives, Who Dies, and Why, author Laurence Gonzales shows in case after case evidence that mental fortitude makes the difference between life or death; between surviving or thriving. The parallels to investing -- especially in volatile markets -- are striking, not only in Gonzales's book, but other not-about-investing-but-still-applicable books about the inner workings of our brains.

Here are nine other reads will help you work through the tricks your mind plays on you in stressful situations (couldn't come at a better time, eh?) and show you how to overcome them. Not only will they make you a better investor, but they'll also help you learn to make smarter decisions in other parts of your life.

1. How the Mind Works

For those of us without doctorate degrees, this is a great read on the progress of modern brain science. Steven Pinker argues that how our minds work is best understood as part evolution, part computer-program, illustrating his lessons with phenomena ranging from the correlation of height to salary to optical illusions. Understanding how our brains work helps us understand how we make decisions -- and allows us to improve the shortcomings of that process.

2. Synectics: The Development of Creative Capacity

Published in the '60s amid "exciting new research" about what spurs creativity, this book is just as relevant today as it was 50 years ago. Author William Gordon makes a compelling argument that creativity is boosted dramatically when people understand the psychological process behind that creativity, and he explores factors that contribute to creativity in individuals and groups.

3. Innumeracy

Author John Allen Paulos sets about trying to close what he considers an appalling gap between the numerical dependency of our society (think science and computers, for starters) and the mathematical illiteracy of its citizens. Investing is by no means all about the numbers, but just as you should learn French before trying to read L'Étranger in the original, you should make sure you understand the intricacies of the numerical lexicon before entering the market.

4. No Two Alike: Human Nature and Individuality

Where do our personalities come from? Judith Harris dispels a number of theories, including one of general differences in "environment." She offers her own theory, laced with scientific research, arguing that we are a function of what she calls our "systems" of relationships, socialization, and status. For anybody curious about why they are the way they are, this book is tremendously thought-provoking.


5. The Selfish Gene

The Selfish Gene does not reject common evolutionary ideas but rather builds on them. Richard Dawkins takes a fresh look at natural selection and argues that a world defined by selfishness is not necessarily a world only of ferocious competition, deception, and exploitation, but also one of altruism and progress. Written for the public and not just for disciples of Darwin, this is book offer insights into the forces that shape our world -- and that certainly encompasses investors.

6. Drive

Common knowledge about what motivates us is wrong. Drawing from a mix of psychology, economics, and sociology research, Daniel Pink debunks the logic behind carrot-and-stick incentives and argues that once basic survival needs are met, we are motivated primarily by a desire to develop and the prospect of mastery. Whether you want to make sure your own motivations are aligned or are trying to motivate someone else, Drive is a must-read.

7. The Psychology of Judgment and Decision Making

How do we reach decisions? More importantly, are we any good at making decisions? This book takes on these questions directly and offers specific ways to improve your own decision-making process. It's so relevant to investing that The Motley Fool requires all new investing analysts read it.

8. Genome

With the human genome now mapped, people have a ton of questions -- and Matt Ridley gets right into the juicy ones, focusing on how our DNA affects things as disperse and contentious as intelligence, sex, and cancer. Ridley isn't writing for scientists, and he isn't presenting new theories; he simply takes a hard look at the evidence now available and makes connections.

9. Influence: The Psychology of Persuasion

What makes a person say "yes" to another's request? Influence is a well-researched look at the tactics that work and why, breaking them down into six categories of psychological influences on our behavior. Invaluable to anyone who wants to make a convincing argument (and that pretty much includes everyone), this book also offers a tremendous edge to you when you are the one being convinced, allowing you to understand the ploys being played against you.

Alex Pape is an analyst on Motley Fool Pro and Motley Fool Options. You can follow all Alex's articles on Twitter.

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Source: http://www.dailyfinance.com/2011/08/09/non-biz-books-to-help-you-think-more-clearly-in-a-crisis/

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Once More, With Feeling: The Press Conference the President Should Have Given

The Press Conference the President Should Have Presented Monday Good afternoon, everyone.  On Friday, we learned that the United States received a downgrade of its credit rating from Standard & Poor?s.  Although we all might feel an impulse to blame the messenger, the downgrade reflects many indisputable financial realities.  Chief among them is that no [...]

Source: http://blogs.forbes.com/greatspeculations/2011/08/09/once-more-with-feeling-the-press-conference-the-president-should-have-given/

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Markets Crash: Does Zero Growth Loom Ahead?


20% decline month-on-month

The global financial markets have been losing serious momentum for coming up to two weeks but they went into freefall today with the fall of many major indices nearing a 20% decline month-on-month.  You will recall that we issued our Amber Alert about two weeks ago and our Red Alert last week in regard to the rising likelihood of a financial crash.  We are sorry to say that our forecasts were remarkably prescient.  Long standing ATCA members will recall that we had issued detailed analyses and warnings in regard to systemic risks associated with global financial markets and world trade before August 2007 and September 2008 as well.  What we are experiencing now is a continuation of those financial and world trade crises and not a new phenomenon.  Between America, Europe and Asia, there is too much debt and too little growth.

US downgrade: a red herring?

It is convenient for some to analyse the global markets crash in the context of the US ratings downgrade over the weekend.  However, if one examines the entire range of US Treasuries, they surged today and the yields have been falling rather than rising which implies lower rather than higher interest rates in the future.  All this suggests that the financial markets shrugged off the implications of a ratings downgrade in regard to US debt.  

What is really driving the markets at present?  

Zero growth looms ever larger for the world and this is what is scaring the markets.  Zero growth means that the markets' earnings expectations are too optimistic as the outlook for world demand turns bleaker.  As a result of that recognition, some other questions now arise:

1. Is zero growth sustainable and what happens next?  
2. What form does zero growth take?
3. Do we end up with: stagnation, stagflation, recession or depression?

Debt: the ever tightening noose

The precise outcome of zero growth depends on the scale and duration of this present phase of the global financial crisis.  If we get zero growth for one quarter then that is not too much of a problem.  If we get zero growth for many quarters, the world economies get sucked into all sorts of complexities in regard to debt management including not just liquidity traps but also solvency traps.  In short, we end up with debt becoming an ever tightening noose around most nations' necks causing mass suffering for individuals, institutions and governments.   Zero growth corresponds with more debt:  as unemployment rises, revenue falls and government spends more to support the unemployed.

World trade:  not back to normal yet

With the start of The Great Unwind on 9th August 2007 -- exactly four years ago -- every nation had to adapt to the longest and deepest recession since "The Great Depression" of the 1930s. And after the Lehman Brothers crisis erupted in September 2008, the world had to cope with the first protracted contraction in world trade since the 1930s.  Even now we have not reached the peak of world trade experienced in August 2008, just before the start of The Great Reset.  World trade has yet to return to those elevated levels.

How long must we endure zero growth?

Is the total quantum of debt as measured against the world's GDP sustainable or does the gravitational pull of total debt pull us back into perpetual contraction?  Is contraction to be feared? If we have lived  through many decades of rising expectations, what happens in a world of contraction? When we have to live with rising unemployment, falling expectations and increasing scarcity, how can demand for products and services rise?  Is this socially or politically digestible after nearly six decades of expansion since the Second World War?

Implications of zero growth

We are once again on the verge of a world-wide zero growth pattern, with banks and businesses failing, and governments seeking to muddle through with a solution.  Whatever the outcome, we will all still be feeling the ripples, if not the tidal waves of financial markets' extreme volatility in the coming days, weeks and months, if not years.  Growth forecasts have become bleak recently but it is too early to tell whether this is a short term phenomenon or the beginning of a longer lasting trend.  It is commonly believed that economic growth is always preferable to zero growth for the following reasons:

1. Creates employment;
2. Higher incomes;
3. Decreases poverty; and
4. Improves the standard of living.

Why do we want economic growth in the first place?  

Economic growth has been the primary mechanism for delivering economic stability since before the industrial revolution and relies on creativity, invention and innovation.  This was not always the case:  ancient peasants lived, mostly, in a zero growth world.  Are we prepared to re-visit the flat-line or dwindling expectations in regard to standards that our ancestors might have had?  

How to create jobs despite zero growth?

If we are left with no choice but zero growth, given that governments no longer have the capacity to borrow more money, and central banks can no longer lower the interest rates or keep printing money -- euphemistically calling it quantitative easing -- to try to stimulate growth, what are the possibilities within a zero growth model for creating jobs? Lower or zero growth with reprioritisation and search for efficiencies and conservation of energy and resources could offer a realistic scenario, particularly for the future of the economy of advanced societies.  

Conclusion

Given the potential prospect for zero growth with continuing high unemployment, by which criteria should any national economy prioritise its executive actions to create new jobs?

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Source: http://feedproxy.google.com/~r/businessinsider/~3/2_fUrSWvIs4/markets-crash-does-zero-growth-loom-ahead-2011-8

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New Wall Street Game Launches On Facebook


Ender’s Fund Inc, founded by Jinsoo Park launches their new Wall Street Game on Facebook today. In the game, you play the role of a fund manager on Wall Street. The game actually ties into real stock market data and Ender’s does a great job of bringing a game mentality to Wall Street talk by using terminology like “beat the Street” and challenging your friends to a “throwdown” to see who can make the most market gains in a certain period of time. 

Where is the social aspect in Wall Street? You can HIRE your facebook friends and invest in their personal stock portfolios in the game. It feels like Mafia Wars meets Gazillionaire Deluxe, that old computer game from the 90’s with real life applications instead of dealing with alien investors. Wall Street Game’s developers say, “If you are winning in our game, you could be winning on the real Wall Street.”

It feels like a very low pressure way to learn about a high pressure job. Will ‘real-life application’ games be the new trend? 

Say goodbye to Angry Birds and say hello to “Let’s make money on Wall Street.”

Please follow SAI on Twitter and Facebook.

Join the conversation about this story »

See Also:

Source: http://feedproxy.google.com/~r/businessinsider/~3/U27PAiSJj7M/wall-street-game-facebook-enders-fund-2011-8

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Bankruptcy: Getting Informed About The Potential Outcomes

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Your debts have become overwhelming and you are unable to keep up with your payments. Bankruptcy can offer debt elimination options while protecting many of your assets. However, bankruptcy is a process that should be managed by a professional. Many times people get into bankruptcy without knowing much about the process or what the potential outcomes could be.

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Source: http://ezinearticles.com/6475548

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Do You Understand Our Financial Malaise?

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This article discusses our Federal debt and deficit. Many of our country's leading newspapers have called the result an "historic debt deal." Here's the real deal on the debt deal: dissemble, delay, defer.

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Source: http://ezinearticles.com/6477454

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Credit Downgrade: What to Expect This Week

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"People do not get what they want or what they expect from the markets; they get what they deserve. ? Mr. Market doesn't give a hoot. He's got a 'Capitalism at Work' T-shirt on and a sledgehammer in his hand."
--
Bill Bonner

Now that America's credit rating has been downgraded, how is Mr. Market going to respond when the markets open tomorrow morning?

No one knows. It could be nothing, or it could be ugly. Maybe this is a wake-up call; maybe the damage is already priced in. The Wall Street Journal recently asked dozens of investors, bankers, and economists what the downgrade means. Nearly all gave some variation of I don't know. S&P appears to have accomplished what perpetual underperformance never could: It humbled Wall Street.  

Although the future is unpredictable, the past is starting to make more sense. From my perspective, it seems that Thursday's 512-point selloff could have been triggered by early knowledge of the downgrade. There's no way to prove this, but think about it: There was no big news on Thursday. No banks failed. No hedge funds collapsed. No countries defaulted. If anything, Thursday brought a spate of earnings reports that should push corporate profits to an all-time high this quarter. Further, rumors of an impending downgrade were spreading like wildfire on Twitter by early Friday morning, more than eight hours before the news was made public. This all potentially bodes well for the markets going forward. Last week's bloodbath may have priced in the bad news.  

Then again, it can't be stressed enough that the traders and algorithms controlling daily market movements have little in common with the long-term, business-oriented view of most Motley Fool investors. After the Flash Crash last May, New Yorker columnist James Surowiecki made a great point: "I don't think yesterday's crash is evidence the market is irrational. It's more that it's a-rational: The computers aren't panicking or herding. They're just following simple rules."

Those rules have nothing to do with the intrinsic value of businesses. They're more about a game of preempting one another -- computers trying to buy and sell before other computers buy and sell. If it comes, a selloff this week isn't necessarily indicative of panic and gloom. It could simply be the actions of short-term investors who are trying to get out first as they perceive that others will be panicky and gloomy. This is why it's so important to ignore short-term market moves and focus on business values.

The real threat from the downgrade is a potential rise in interest rates, which could slow the economy and swell budget deficits. But as I wrote last week, this is no sure thing. Japan's interest rates fell after it lost its AAA credit rating. JPMorgan Chase once did a study showing the effect on interest rates after a group of countries were stripped of their AAA rating. One week out, rates had hardly budged. On average, countries with AA credit pay more to borrow than those with AAA ratings do, but the difference is typically already reflected before a downgrade hits. This tendency bodes well for Treasuries, and it hits on a point that economists have been making lately: The Treasury market is so big, and there are so few alternatives, that the downgrade might just mean that AA becomes the new AAA.

And keep in mind that the downgrade should have surprised no one. S&P put the Treasury on negative-credit watch back in April, stating that there was a 50-50 chance the United States would lose its AAA rating in the near future. S&P's rationale for Friday's downgrade wasn't based on proprietary financial analysis but rather on a statement of the painfully obvious: America's political system is dysfunctional. Who didn't already know this?

Something else to be mindful of is who this downgrade came from: a rating agency with a dubious track record at best. If Goldman Sachs had downgraded Treasuries, no one would care. If Warren Buffett downgraded Treasuries, few would notice. Bill Gross, one of the world's most successful bond investors, ditched Treasuries earlier this year, and no one blinked. Asked about the consequences of the downgrade on Saturday, Buffett quipped: "Remember, this is the same group that downgraded Berkshire."

Indeed, the original downgrade report presented to the Treasury on Friday morning had a $2 trillion mathematical error. S&P doesn't dispute the mistake. After the Treasury pointed out the error, "S&P still chose to proceed ? by simply changing their principal rationale for their credit rating decision from an economic one to a political one," the Treasury wrote yesterday.

It's hard to argue that the United States doesn't deserve a downgrade -- particularly based on a dysfunctional legislature -- but keep it in appropriate context before making any personal investment decisions.

What do you think the downgrade means for your investments? Let us know in the comments section below.

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Source: http://feeds.fool.com/~r/usmf/foolwatch/~3/Umi9av4SNow/credit-downgrade-what-to-expect-this-week.aspx

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